Chapter 4 Systems Design: Process Costing Solutions to Questions 4-1 A process costing system should be used in situations where a homogeneous product is produced on a continuous basis. 4-2 1. Job-order costing and process costing have the same basic purposes—to assign materials, labor, and overhead cost to products and to provide a mechanism for computing unit product costs. 2. Both systems use the same basic manufacturing accounts. 3. Costs flow through the accounts in basically the same way in both systems. 4-3 Costs are accumulated by department in a process costing system. 4-4 In a process costing system, the activity performed in a department must be performed uniformly on all units moving through it and the output of the department must be homogeneous. 4-5 Cost accumulation is simpler under process costing because costs only need to be assigned to departments—not separate jobs. A company usually has a small number of processing departments, whereas a job-order costing system often must keep track of the costs of hundreds or even thousands of jobs. 4-6 In a process costing system, a Work in Process account is maintained for each separate processing department. 4-7 4-8 The costs that might be added in the Firing Department include: (1) costs transferred in from the Mixing Department; (2) materials costs added in the Firing Department; (3) labor costs added in the Firing Department; and (4) overhead costs added in the Firing Department. 4-9 Under the weighted-average method, equivalent units of production consist of units transferred to the next department (or to finished goods) during the period plus the equivalent units in the department’s ending work in process inventory. 4-10 A quantity schedule summarizes the physical flow of units through a department during a period. It serves several purposes. First, it provides information about activity in the department and also shows the stage of completion of any in-process units. Second, it provides data for computing the equivalent units and for preparing the other parts of the production report. 4-11 In process costing a unit of product accumulates cost in each department that it passes through, with the costs of one department added to the costs of the preceding department in a snowballing fashion. 4-12 The company will want to distinguish between the costs of the metals used to make the medallions, but the medals are otherwise identical and go through the same production processes. Thus, operation costing is ideally suited for the company’s needs. The journal entry would be: Work in Process, Firing ...................................... 4-13 Any company that manufactures prodXXXX ucts that have some common characteristics and Work in Process, Mixing .............................. XXXX some individual characteristics may want to use operation costing. Examples include textiles, shoes, electronic parts, and clothing. © The McGraw-Hill Companies, Inc., 2008. All rights reserved. 146 Managerial Accounting, 12th Edition 4-14 Under the FIFO method, units transferred out are divided into two parts. One part consists of the units in the beginning inventory. Only the work needed to complete these units is shown as part of the equivalent units for the current period. The other part of the units transferred out consists of the units started and completed during the current period; these units are shown as a separate amount in the equivalent units computation under the FIFO method. 4-15 Under the FIFO method, units transferred out are divided into two groups. The first group consists of units from the beginning work in process inventory. The second group consists of units started and completed during the period. 4-16 The FIFO method is superior to the weighted-average method for cost control because current performance should be measured in relation to costs of the current period only, and the weighted-average method mixes these costs in with costs of the prior period. Thus, under the weighted-average method, the department’s apparent performance in the current period is influenced to some extent by what happened in a prior period. © The McGraw-Hill Companies, Inc., 2008. All rights reserved. Solutions Manual, Chapter 4 147 Exercise 4-1 (20 minutes) a. To record issuing raw materials for use in production: Work in Process—Molding Department ......... 23,000 Work in Process—Firing Department............. 8,000 Raw Materials ....................................... 31,000 b. To record direct labor costs incurred: Work in Process—Molding Department ......... Work in Process—Firing Department............. Wages Payable ..................................... 12,000 7,000 19,000 c. To record applying manufacturing overhead: Work in Process—Molding Department ......... Work in Process—Firing Department............. Manufacturing Overhead ....................... 25,000 37,000 62,000 d. To record transfer of unfired, molded bricks from the Molding Department to the Firing Department: Work in Process—Firing Department............. 57,000 Work in Process—Molding Department ... 57,000 e. To record transfer of finished bricks from the Firing Department to the finished bricks warehouse: Finished Goods............................................ 103,000 Work in Process—Firing Department ...... 103,000 f. To record Cost of Goods Sold: Cost of Goods Sold ...................................... Finished Goods ..................................... 101,000 101,000 © The McGraw-Hill Companies, Inc., 2008. All rights reserved. 148 Managerial Accounting, 12th Edition Exercise 4-2 (10 minutes) Weighted-Average Method Equivalent Units (EU) Materials Conversion Units transferred out ...................................................... 190,000 190,000 Work in process, ending: 15,000 units × 80% .................................................... 12,000 15,000 units × 40% .................................................... 6,000 Equivalent units ............................................................. 202,000 196,000 © The McGraw-Hill Companies, Inc., 2008. All rights reserved. Solutions Manual, Chapter 4 149 Exercise 4-3 (15 minutes) Weighted-Average Method Materials Labor Work in process, May 1 .................................................. $ 18,000 $ 5,500 Cost added during May ................................................... 238,900 80,300 Total cost (a) ................................................................. $256,900 $85,800 Equivalent units of production (b) ................................... 35,000 33,000 Cost per equivalent unit (a) ÷ (b) ................................... $7.34 $2.60 Overhead $ 27,500 401,500 $429,000 33,000 $13.00 © The McGraw-Hill Companies, Inc., 2008. All rights reserved. 150 Managerial Accounting, 12th Edition Exercise 4-4 (10 minutes) Weighted-Average Method Ending work in process inventory: Equivalent units of production ................. Cost per equivalent unit .......................... Cost of ending work in process inventory . Units completed and transferred out: Units transferred to the next department . Cost per equivalent unit .......................... Cost of units completed and transferred out .................................................... Materials Conversion Total 300 $31.56 $9,468 100 $9.32 $932 $10,400 1,300 $31.56 1,300 $9.32 $41,028 $12,116 $53,144 © The McGraw-Hill Companies, Inc., 2008. All rights reserved. Solutions Manual, Chapter 4 151 Exercise 4-5 (10 minutes) FIFO Method To complete beginning work in process: Materials: 400 units x (100% – 75%) ................. Conversion: 400 units x (100% – 25%) .............. Units started and completed during the period (42,600 units started – 500 units in ending inventory) ............................................................ Ending work in process Materials: 500 units x 80% complete .................. Conversion: 500 units x 30% complete ............... Equivalent units of production ................................ Materials Conversion 100 42,100 400 42,600 300 42,100 150 42,550 © The McGraw-Hill Companies, Inc., 2008. All rights reserved. 152 Managerial Accounting, 12th Edition Exercise 4-6 (10 minutes) FIFO Method Materials Labor Overhead Cost added during May (a).............................................. $193,320 $62,000 $310,000 Equivalent units of production (b) ................................... 27,000 25,000 25,000 Cost per equivalent unit (a) ÷ (b).................................... $7.16 $2.48 $12.40 © The McGraw-Hill Companies, Inc., 2008. All rights reserved. Solutions Manual, Chapter 4 153 Exercise 4-7 (15 minutes) FIFO Method Ending work in process inventory: Materials Conversion Equivalent units of production ............... Cost per equivalent unit ........................ Cost of ending work in process inventory Total 800 $4.40 $3,520 200 $1.30 $260 $3,780 $2,700 $380 $3,080 400 $4.40 700 $1.30 $1,760 $910 7,000 $4.40 7,000 $1.30 Units transferred out: Cost in beginning work in process inventory ................................................. Cost to complete the units in beginning work in process inventory: Equivalent units of production required to complete the beginning inventory Cost per equivalent unit ...................... Cost to complete the units in beginning inventory ....................................... Cost of units started and completed this period: Units started and completed this period (8,000 units completed and transferred to the next department – 1,000 units in beginning work in process inventory) .......................... Cost per equivalent unit ...................... Cost of units started and completed this period ..................................... Total cost of units transferred out .......... $30,800 $2,670 $9,100 $39,900 $45,650 © The McGraw-Hill Companies, Inc., 2008. All rights reserved. 154 Managerial Accounting, 12th Edition Exercise 4-8 (15 minutes) Service Departments AdminiFacility stration Services Departmental costs before allocations ....................... $2,400,000 $1,600,000 Allocations: Administration costs (20/25, 5/25) .............. (2,400,000) Facility Services costs (70/100, 30/100)* ....... (1,600,000) Total costs after allocation.. $ 0 $ 0 Operating Departments Undergraduate Graduate Programs Programs $26,800,000 $5,700,000 1,920,000 480,000 1,120,000 $29,840,000 480,000 $6,660,000 Total $36,500,000 $36,500,000 *Based on the space occupied by the two operating departments, which is 100,000 square feet. © The McGraw-Hill Companies, Inc., 2008. All rights reserved. Solutions Manual, Chapter 4 155 Exercise 4-9 (15 minutes) Service Departments Administration Janitorial Departmental costs before allocations ..... $150,000 $40,000 Allocations: Administration costs (160/4,000, 3,100/4,000, 740/4,000)* .................................... (150,000) 6,000 Janitorial costs (4,000/5,000, 1,000/5,000)† ............ (46,000) Total costs after allocation...................... $ 0 $ 0 Operating Departments Groceries Gifts $2,320,000 $950,000 116,250 Total $3,460,000 27,750 36,800 9,200 $2,473,050 $986,950 $3,460,000 *Based on employee hours in the other three departments, 160 + 3,100 + 740 = 4,000. †Based on space occupied by the two operating departments, 4,000 + 1,000 = 5,000. Both the Janitorial Department costs of $40,000 and the Administration costs of $6,000 that have been allocated to the Janitorial Department are allocated to the two operating departments. © The McGraw-Hill Companies, Inc., 2008. All rights reserved. 156 Managerial Accounting, 12th Edition Exercise 4-10 (10 minutes) Work in Process—Cooking .............................................. 42,000 Raw Materials Inventory ........................................... 42,000 Work in Process—Cooking .............................................. 50,000 Work in Process—Molding .............................................. 36,000 Wages Payable ......................................................... 86,000 Work in Process—Cooking .............................................. 75,000 Work in Process—Molding .............................................. 45,000 Manufacturing Overhead ........................................... 120,000 Work in Process—Molding .............................................. 160,000 Work in Process—Cooking ......................................... 160,000 Finished Goods .............................................................. 240,000 Work in Process—Molding ......................................... 240,000 © The McGraw-Hill Companies, Inc., 2008. All rights reserved. Solutions Manual, Chapter 4 157 Exercise 4-11 (20 minutes) Weighted-Average Method 1. 2. Units transferred to the next department ........................................ Ending work in process: Materials: 8,000 units × 75% complete...................................... Labor: 8,000 units × 50% complete ............................................ Overhead: 8,000 units × 50% complete...................................... Equivalent units of production ............ Materials 42,000 Labor 42,000 Overhead 42,000 6,000 4,000 48,000 Materials 46,000 Labor Cost of beginning work in process ....... $ 4,320 $ 1,040 Costs added during the period ............ 52,800 21,500 Total cost (a) ..................................... $ 57,120 $ 22,540 Equivalent units of production (b) ....... 48,000 46,000 Cost per equivalent unit (a) ÷ (b)........ $1.19 $0.49 4,000 46,000 Overhead $ 1,790 32,250 $ 34,040 46,000 $0.74 © The McGraw-Hill Companies, Inc., 2008. All rights reserved. 158 Managerial Accounting, 12th Edition Exercise 4-12 (20 minutes) FIFO Method 1. To complete beginning work in process: Materials: 5,000 gallons × (100% − 80%) ................................ Labor: 5,000 gallons × (100% − 60%) ................................ Overhead: 5,000 gallons × (100% − 60%) ................................ Units started and completed during the period* ............................................... Ending work in process: Materials: 8,000 gallons × 75% ........... Labor: 8,000 gallons × 50% ................ Overhead: 8,000 gallons × 50% .......... Equivalent units of production ................ Materials Labor Overhead 1,000 2,000 2,000 37,000 6,000 44,000 37,000 4,000 43,000 37,000 4,000 43,000 * 45,000 units started into production – 8,000 units in ending work in process = 37,000 started and completed 2. Cost added during the period (a) ............ Equivalent units of production (b) ........... Cost per equivalent unit (a) ÷ (b) ......... ` Materials Labor Overhead $52,800 $21,500 44,000 43,000 $1.20 $0.50 $32,250 43,000 $0.75 © The McGraw-Hill Companies, Inc., 2008. All rights reserved. Solutions Manual, Chapter 4 159 Exercise 4-13 (45 minutes) FIFO Method 1. Computation of the total cost per equivalent unit of production: Cost per equivalent unit of production for material................................................. $25.40 Cost per equivalent unit of production for conversion ............................................. 18.20 Total cost per equivalent unit of production ............................................................... $43.60 2. Computation of equivalent units in ending inventory: Materials Conversion Units in ending inventory ................................................ 300 300 Percentage completed .................................................... 70 % 60 % Equivalent units of production ......................................... 210 180 3. Computation of equivalent units required to complete the beginning inventory: Materials Conversion Units in beginning inventory............................................ 400 400 Percentage uncompleted ................................................ 20 % 60 % Equivalent units of production ......................................... 80 240 4. Units transferred to the next department ......................... 3,100 Units from the beginning inventory.................................. 400 Units started and completed during the period ................. 2,700 © The McGraw-Hill Companies, Inc., 2008. All rights reserved. 160 Managerial Accounting, 12th Edition Exercise 4-13 (continued) 5. Ending work in process inventory: Equivalent units of production ................................................... Cost per equivalent unit ............................................................ Cost of ending work in process inventory ................................... Materials Conversion 210 $25.40 $5,334 Units transferred out: Cost from the beginning work in process inventory..................... $5,321 Cost to complete the units in beginning work in process inventory: Equivalent units of production required to complete the units in beginning inventory....................................................... 80 Cost per equivalent unit ....................................................... $25.40 Cost to complete the units in beginning inventory .................. $2,032 Cost of units started and completed this period: Units started and completed this period................................. 2,700 Cost per equivalent unit ....................................................... $25.40 Cost of units started and completed this period...................... $68,580 Total cost of units transferred out ............................................. Total 180 $18.20 $3,276 $8,610 $5,809 $11,040 240 $18.20 $4,368 $6,400 2,700 $18.20 $49,140 $117,720 $135,160 © The McGraw-Hill Companies, Inc., 2006. All rights reserved. Solutions Manual, Chapter 4 161 Exercise 4-14 (15 minutes) Weighted-Average Method Materials Conversion Pounds transferred to the next department during July* .................................................................. 375,000 Work in process, July 31: Materials: 25,000 pounds × 100% complete ......... 25,000 Conversion: 25,000 pounds × 60% complete ........ Equivalent units of production ................................ 400,000 375,000 15,000 390,000 * 20,000 + 380,000 – 25,000 = 375,000 © The McGraw-Hill Companies, Inc., 2008. All rights reserved. 162 Managerial Accounting, 12th Edition Exercise 4-15 (15 minutes) FIFO Method Conversion Materials Costs To complete the beginning work in process: Materials: 20,000 pounds × (100% − 100%)........ 0 Conversion costs: 20,000 pounds × (100% − 30%) ...................... Started and completed during May (380,000 pounds started − 25,000 pounds in ending inventory) ............................................................. 355,000 Ending work in process: Materials: 25,000 pounds × 100% complete ......... 25,000 Conversion costs: 25,000 pounds × 60% complete ................................................................ Equivalent units of production ................................ 380,000 14,000 355,000 15,000 384,000 © The McGraw-Hill Companies, Inc., 2008. All rights reserved. Solutions Manual, Chapter 4 163 Exercise 4-16 (20 minutes) Service Departments Administration Janitorial Operating Departments Maintenance Binding Printing Total Overhead costs ................................... $140,000 $105,000 $ 48,000 $275,000 $430,000 $998,000 Allocations: Administration costs: (5%, 20%, 45%, 30%)* ................ (140,000) 7,000 28,000 63,000 42,000 Janitorial costs: (1/8, 2/8, 5/8) ......... (112,000) 14,000 28,000 70,000 Maintenance costs: (1/3, 2/3) ........... (90,000) 30,000 60,000 Total overhead costs after allocations ... $ 0 $ 0 $ 0 $396,000 $602,000 $998,000 * Allocations can be shown in percentages, in fractions, or as a rate per unit of activity. For example, Administration allocations have been shown as percentages, but they could have been shown as 1/20; 4/20; 9/20; and 6/20 or they could have been shown as $200 per employee. Fractions should be used if percentages result in rounding errors. © The McGraw-Hill Companies, Inc., 2008. All rights reserved. 164 Managerial Accounting, 12th Edition Exercise 4-16 (continued) Supporting computations: Administration costs allocated on the basis of: Janitorial .................. 35 employees 5% Maintenance ............. 140 employees 20 Binding .................... 315 employees 45 Printing .................... 210 employees 30 Total ........................ 700 employees 100 % Janitorial costs allocated on the basis of: Maintenance ............. 20,000 square feet Binding .................... 40,000 square feet Printing .................... 100,000 square feet Total ........................ 160,000 square feet 1/8 2/8 5/8 8/8 Maintenance costs allocated on the basis of: Binding .................... 30,000 hours Printing .................... 60,000 hours Total ........................ 90,000 hours 1/3 2/3 3/3 © The McGraw-Hill Companies, Inc., 2008. All rights reserved. Solutions Manual, Chapter 4 Exercise 4-17 (20 minutes) Service Departments Administration Janitorial Operating Departments Maintenance Overhead costs ............................ $140,000 $105,000 $ 48,000 Allocation: Administration costs: (3/5, 2/5).. (140,000) Janitorial costs: (2/7, 5/7) .......... (105,000) Maintenance costs: (1/3, 2/3) .... (48,000) Total overhead costs after allocations ......................................... $ 0 $ 0 $ 0 Binding $275,000 84,000 30,000 16,000 $405,000 Printing Total $430,000 $998,000 56,000 75,000 32,000 $593,000 $998,000 Supporting computations: Administration Binding .. 315 employees 3/5 Printing .. 210 employees 2/5 Total ...... 525 employees 5/5 Janitorial 40,000 square feet 2/7 100,000 square feet 5/7 140,000 square feet 7/7 Maintenance 30,000 hours 1/3 60,000 hours 2/3 90,000 hours 3/3 © The McGraw-Hill Companies, Inc., 2008. All rights reserved. 166 Managerial Accounting, 12th Edition Exercise 4-18 (15 minutes) Weighted-Average Method 1. Units transferred to the next process ............... Ending work in process: Materials: 10,000 units × 100% complete ..... Conversion: 10,000 units × 30% complete .... Equivalent units of production ......................... 2. Cost of beginning work in process .................. Cost added during the period ......................... Total cost (a) ................................................ Equivalent units of production (b)................... Cost per equivalent unit (a) ÷ (b) ................... 3. Ending work in process inventory: Equivalent units of production (see above) ........................ Cost per equivalent unit (see above) ............................... Cost of ending work in process inventory ............................ Materials Conversion 175,000 10,000 185,000 175,000 3,000 178,000 Materials Conversion $ 1,500 $ 4,000 54,000 352,000 $55,500 $356,000 185,000 178,000 $0.30 $2.00 Materials Conversion 10,000 3,000 $0.30 $2.00 $3,000 $6,000 Total $9,000 Units completed and transferred out: Units transferred to the next process .............................. Cost per equivalent unit (see above) ........................ Cost of units completed and transferred out ................... 175,000 175,000 $0.30 $2.00 $52,500 $350,000 $402,500 © The McGraw-Hill Companies, Inc., 2008. All rights reserved. Solutions Manual, Chapter 4 167 Problem 4-19 (45 minutes) Weighted-Average Method 1. Equivalent Units of Production Transferred to bottling ..................................... Ending work in process: Materials: 40,000 units x 100% complete ....... Conversion: 40,000 units x 25% complete ...... Equivalent units of production .......................... 2. Cost per Equivalent Unit 160,000 40,000 200,000 160,000 10,000 170,000 Materials Conversion Cost of beginning work in process ................ Cost added during the period ....................... Total cost (a) .............................................. Equivalent units of production (b) ................ Cost per equivalent unit, (a) ÷ (b) ............... 3. Applying Costs to Units Materials Conversion $ 25,200 334,800 $360,000 200,000 $1.80 Materials Conversion Ending work in process inventory: Equivalent units of production (materials: 40,000 units x 100% complete; conversion: 40,000 units x 25% complete) 40,000 Cost per equivalent unit ....... $1.80 Cost of ending work in process inventory ........................... $72,000 Units completed and transferred out: Units transferred to the next department ....................... 160,000 Cost per equivalent unit ....... $1.80 Cost of units completed and transferred out................... $288,000 $ 24,800 238,700 $263,500 170,000 $1.55 Total 10,000 $1.55 $15,500 $87,500 160,000 $1.55 $248,000 $536,000 © The McGraw-Hill Companies, Inc., 2008. All rights reserved. 168 Managerial Accounting, 12th Edition Problem 4-19 (continued) 4. Cost Reconciliation Costs to be accounted for: Cost of beginning work in process inventory ($25,200 + $24,800) .................................. Costs added to production during the period ($334,800 + $238,700) .............................. Total cost to be accounted for ....................... Costs accounted for as follows: Cost of ending work in process inventory ...... Cost of units completed and transferred out .. Total cost accounted for ............................... $ 50,000 573,500 $623,500 $ 87,500 536,000 $623,500 © The McGraw-Hill Companies, Inc., 2008. All rights reserved. Solutions Manual, Chapter 4 169 Problem 4-20 (45 minutes) FIFO method 1. Equivalent Units of Production To complete beginning work in process: Materials: 20,000 units x (100% − 100%) ..... Conversion: 20,000 units x (100% − 75%) .... Units started and completed during the period (180,000 units started − 40,000 units in ending inventory) ............................................... Ending work in process: Materials: 40,000 units x 100% complete ...... Conversion: 40,000 units x 25% complete ..... Equivalent units of production ........................... 2. Cost per Equivalent Unit Cost added during the period (a) .............. Equivalent units of production (b) ............. Cost per equivalent unit (a) ÷ (b) ............. Materials Conversion 0 140,000 40,000 180,000 5,000 140,000 10,000 155,000 Materials Conversion $334,800 180,000 $1.86 $238,700 155,000 $1.54 3. See the next page. 4. Cost Reconciliation Costs to be accounted for: Cost of beginning work in process inventory ........... Costs added to production during the period ($334,800 + $238,700) ...................................... Total cost to be accounted for ................................ Costs accounted for as follows: Cost of ending work in process inventory ................ Costs of units transferred out ................................. Total cost accounted for ........................................ $ 50,000 573,500 $623,500 $ 89,800 533,700 $623,500 © The McGraw-Hill Companies, Inc., 2008. All rights reserved. 170 Managerial Accounting, 12th Edition Problem 4-20 (continued) 3. Costs of Ending Work in Process Inventory and Units Transferred Out Ending work in process inventory: Equivalent units of production ................................................. Cost per equivalent unit .......................................................... Cost of ending work in process inventory ................................. Materials Conversion 40,000 $1.86 $74,400 Units transferred out: Cost in beginning work in process inventory ............................ $25,200 Cost to complete the units in beginning work in process inventory: Equivalent units of production required to complete the beginning inventory ............................................................ 0 Cost per equivalent unit ..................................................... $1.86 Cost to complete the units in beginning inventory ................ 0 Cost of units started and completed this period: Units started and completed this period .............................. 140,000 Cost per equivalent unit ..................................................... $1.86 Cost of units started and completed this period ................... $260,400 Cost of units transferred out ................................................... Total 10,000 $1.54 $15,400 $89,800 $24,800 $50,000 5,000 $1.54 $7,700 $7,700 140,000 $1.54 $215,600 $476,000 $533,700 © The McGraw-Hill Companies, Inc., 2008. All rights reserved. Solutions Manual, Chapter 4 171 Problem 4-21 (45 minutes) Weighted-Average Method 1. Equivalent Units of Production Transferred to next department* ...................... Ending work in process: Materials: 15,000 units x 60% complete ......... Labor: 15,000 units x 20% complete .............. Overhead: 15,000 units × 20% complete ........ Equivalent units of production .......................... Materials 95,000 9,000 104,000 Labor 95,000 3,000 98,000 Overhead 95,000 3,000 98,000 *Units in ending inventory = Units in beginning work in process + Units started into production − Units completed and transferred out = 10,000 + 100,000 − 95,000 = 15,000 2. Cost per Equivalent Unit Cost of beginning work in process ................ Cost added during the period ....................... Total cost (a) .............................................. Equivalent units of production (b) ................ Cost per equivalent unit, (a) ÷ (b) ............... Materials $ 1,500 154,500 $156,000 104,000 $1.50 Labor $ 1,800 22,700 $ 24,500 98,000 $0.25 Overhead $ 5,400 68,100 $ 73,500 98,000 $0.75 © The McGraw-Hill Companies, Inc., 2008. All rights reserved. 172 Managerial Accounting, 12th Edition Problem 4-21 (continued) 3. Cost of Ending Work in Process Inventory and Units Transferred Out Materials Ending work in process inventory: Equivalent units of production (materials: 15,000 units x 60% complete; labor and overhead: 15,000 units x 20% complete) 9,000 Cost per equivalent unit ....... $1.50 Cost of ending work in process inventory ........................... $13,500 Units completed and transferred out: Units transferred to the next department ....................... 95,000 Cost per equivalent unit ....... $1.50 Cost of units completed and transferred out................... $142,250 Labor Overhead 3,000 $0.25 3,000 $0.75 $750 $2,250 95,000 $0.25 95,000 $0.75 $23,750 $71,250 Total $16,500 $237,500 © The McGraw-Hill Companies, Inc., 2008. All rights reserved. Solutions Manual, Chapter 4 173 Problem 4-21 (continued) 4. Cost Reconciliation Costs to be accounted for: Cost of beginning work in process inventory ($1,500 + $1,800 + $5,400)....................... Costs added to production during the period ($154,500 + $22,700 + $68,100) ............... Total cost to be accounted for ....................... Costs accounted for as follows: Cost of ending work in process inventory ...... Cost of units completed and transferred out .. Total cost accounted for ............................... $ 8,700 245,300 $254,000 $ 16,500 237,500 $254,000 © The McGraw-Hill Companies, Inc., 2008. All rights reserved. 174 Managerial Accounting, 12th Edition Problem 4-22 (45 minutes) FIFO Method 1. Equivalent Units of Production To complete beginning work in process: Materials: 10,000 units x (100% − 100%) ..... Conversion: 10,000 units x (100% − 30%) .... Units started and completed during the period (170,000 units started − 20,000 units in ending inventory) ............................................... Ending work in process: Materials: 20,000 units x 100% complete ...... Conversion: 20,000 units x 40% complete ..... Equivalent units of production ........................... 2. Cost per Equivalent Unit Cost added during the period (a) .............. Equivalent units of production (b) ............. Cost per equivalent unit (a) ÷ (b) ............. Materials Conversion 0 150,000 20,000 170,000 7,000 150,000 8,000 165,000 Materials Conversion $139,400 170,000 $0.82 $244,200 165,000 $1.48 3. See the next page. 4. Cost Reconciliation Costs to be accounted for: Cost of beginning work in process inventory ($8,500 + $4,900) ............................................. Costs added to production during the period ($139,400 + $244,200) ...................................... Total cost to be accounted for ................................ Costs accounted for as follows: Cost of ending work in process inventory ................ Costs of units transferred out ................................. Total cost accounted for ........................................ $ 13,400 383,600 $397,000 $ 28,240 368,760 $397,000 © The McGraw-Hill Companies, Inc., 2008. All rights reserved. Solutions Manual, Chapter 4 175 Problem 4-22 (45 minutes) 3. Costs of Ending Work in Process Inventory and Units Transferred Out Materials Conversion Ending work in process inventory: Equivalent units of production ................................................. 170,000 Cost per equivalent unit .......................................................... $0.82 Cost of ending work in process inventory ................................. $139,400 Units transferred out: Cost in beginning work in process inventory ............................ $8,500 Cost to complete the units in beginning work in process inventory: Equivalent units of production required to complete the beginning inventory ............................................................ 0 Cost per equivalent unit ..................................................... $0.82 Cost to complete the units in beginning inventory ................ $0 Cost of units started and completed this period: Units started and completed this period .............................. 150,000 Cost per equivalent unit ..................................................... $0.82 Cost of units started and completed this period ................... $123,000 Cost of units transferred out ................................................... © The McGraw-Hill Companies, Inc., 2008. All rights reserved. 176 Managerial Accounting, 12th Edition Total 165,000 $1.48 $244,200 $383,600 $4,900 $13,400 7,000 $1.48 $10,360 $10,360 150,000 $1.48 $222,000 $345,000 $368,760 Problem 4-23 (45 minutes) Housekeeping Services Variable costs .............................. $ 0 $193,860 $158,840 Food Services allocation: $2.70 per meal × 800 meals ...... $2.70 per meal × 2,000 meals ... $2.70 per meal × 1,000 meals ... $2.70 per meal × 68,000 meals . Admin. Services allocation: $3.50 per file × 14,000 files ...... $3.50 per file × 7,000 files ........ $3.50 per file × 25,000 files ...... Total variable costs ...................... $ Food Services Administrative General Services Laboratory Radiology Hospital (2,160) (5,400) (2,700) (183,600) 0 $ 2,160 $243,600 5,400 (49,000) 49,000 (24,500) (87,500) 0 $ 0 $298,000 $304,800 $ 74,500 2,700 183,600 24,500 87,500 $332,000 $345,600 © The McGraw-Hill Companies, Inc., 2008. All rights reserved. Solutions Manual, Chapter 4 177 Problem 4-23 (continued) Housekeeping Services Fixed costs .................................. $87,000 Food Services $107,200 Housekeeping Services allocation @ $0.60 per square foot: $0.60 × 13,000 square feet ....... (7,800) $0.60 × 6,500 square feet ......... (3,900) $0.60 × 10,000 square feet ....... (6,000) $0.60 × 7,500 square feet ......... (4,500) $0.60 × 108,000 square feet ..... (64,800) Food Services allocation: 0.8% × $115,000 ................... 2.4% × $115,000 ................... 1.6% × $115,000 ................... 95.2% × $115,000 ................... Administrative General Services Laboratory Radiology Hospital $90,180 7,800 3,900 (920) (2,760) (1,840) (109,480) Admin. Services allocation: 30% × $95,000 ....................... 20% × $95,000 ....................... 50% × $95,000 ....................... 920 (28,500) (19,000) (47,500) $162,300 $215,700 $401,300 6,000 2,760 28,500 4,500 1,840 19,000 64,800 109,480 47,500 Total fixed costs .......................... $ 0 $ 0 $ 0 $199,560 $241,040 $623,080 Total overhead costs .................... $ 0 $ 0 $ 0 $497,560 $573,040 $968,680 © The McGraw-Hill Companies, Inc., 2008. All rights reserved. 178 Managerial Accounting, 12th Edition Problem 4-23 (continued) Computation of allocation rates: Variable Food Services: Allocation rate= = Variable food services costs Meals served $193,860 71,800 meals =$2.70 per meal Variable Administrative Services: Allocation rate= = Variable administrative services costs Files processed $158,840 + $2,160 46,000 files =$3.50 per file Fixed Housekeeping Services: Allocation rate= = Fixed housekeeping services costs Square feet $87,000 150,000 square feet - 5,000 square feet =$0.60 per square foot © The McGraw-Hill Companies, Inc., 2008. All rights reserved. Solutions Manual, Chapter 4 179 Problem 4-24 (30 minutes) Weighted-Average Method 1. The equivalent units were: Transferred to next department.................. Ending work in process: Materials: 40,000 units x 75% complete ... Conversion: 40,000 units x 60% complete Equivalent units of production .................... 2. The costs per equivalent unit were: Cost of beginning work in process ................ Cost added during the period ....................... Total cost (a) .............................................. Equivalent units of production (b) ................ Cost per equivalent unit, (a) ÷ (b) ............... Materials Conversion 190,000 30,000 220,000 190,000 24,000 214,000 Materials Conversion $67,800 579,000 $646,800 220,000 $2.94 3. Total units transferred to the next department ... Less units in the May 1 inventory ...................... Units started and completed in May................... $30,200 248,000 $278,200 214,000 $1.30 30,000 5,000 25,000 © The McGraw-Hill Companies, Inc., 2008. All rights reserved. 180 Managerial Accounting, 12th Edition Problem 4-24 (continued) 4. No, the manager should not be rewarded for good cost control. The Mixing Department’s low unit cost for April occurred because the costs of the prior month have been averaged in with April’s costs. This is a major criticism of the weighted-average method in that the costs computed for product costing purposes can’t be used to evaluate cost control or to measure performance for the current period. © The McGraw-Hill Companies, Inc., 2008. All rights reserved. Solutions Manual, Chapter 4 Problem 4-25 (45 minutes) Weighted-Average Method 1. Equivalent Units of Production Materials Transferred to next department* ...................... 170,000 Ending work in process: Materials: 15,000 pounds x 100% complete ... 15,000 Labor & Overhead: 15,000 pounds x 2/3 complete .......................................................... Equivalent units of production .......................... 185,000 *18,000 + 167,000 – 15,000 = 170,000. 2. Cost per Equivalent Unit Materials Cost of beginning work in process ................ Cost added during the period ....................... Total cost (a) .............................................. Equivalent units of production (b) ................ Cost per equivalent unit, (a) ÷ (b) ............... $ 14,600 133,400 $148,000 185,000 $0.80 Labor & Overhead 170,000 10,000 180,000 Labor & Overhead $ 7,200 226,800 $234,000 180,000 $1.30 3. Cost of Ending Work in Process Inventory and Units Transferred Out Materials Conversion Ending work in process inventory: Equivalent units of production (see above) ....................... 15,000 Cost per equivalent unit ....... $0.80 Cost of ending work in process inventory ........................... $12,000 Units completed and transferred out: Units transferred to the next department ....................... 170,000 Cost per equivalent unit ....... $0.80 Cost of units completed and transferred out................... $136,000 Total 10,000 $1.30 $13,000 $25,000 170,000 $1.30 $221,000 $357,000 © The McGraw-Hill Companies, Inc., 2006. All rights reserved. 182 Managerial Accounting, 12th Edition Problem 4-25 (continued) 4. In computing unit costs, the weighted-average method mixes costs of the prior period with current period costs. Thus, under the weightedaverage method, unit costs are influenced to some extent by what happened in a prior period. This problem becomes particularly significant when attempting to measure performance in the current period. Good (or bad) cost control in the current period might be concealed by the costs that have been brought forward in the beginning inventory. © The McGraw-Hill Companies, Inc., 2008. All rights reserved. Solutions Manual, Chapter 4 183 Problem 4-26 (60 minutes) Weighted-Average Method 1. The equivalent units are: Units completed during the year ..................... Work in process, Dec. 31: Materials: 300,000 units × 100% complete .. Labor: 300,000 units × 50% complete ......... Overhead: 300,000 units × 50% complete ... Equivalent units of production ........................ Materials 900,000 300,000 Labor 900,000 150,000 Overhead 900,000 1,200,000 1,050,000 150,000 1,050,000 Materials Labor Overhead The costs per equivalent unit are: Work in process, Jan. 1.................................. Cost added during the year ............................ Total cost (a) ................................................ Equivalent units of production (b)................... Cost per equivalent unit (a) ÷ (b) ................... $ 200,000 $ 315,000 $ 189,000 * 1,300,000 1,995,000 1,197,000 ** $1,500,000 $2,310,000 $1,386,000 1,200,000 1,050,000 1,050,000 $1.25 $2.20 $1.32 * 60% × $315,000 = $189,000 ** 60% × $1,995,000 = $1,197,000 © The McGraw-Hill Companies, Inc., 2008. All rights reserved. 184 Managerial Accounting, 12th Edition Problem 4-26 (continued) 2. The amount of cost that should be assigned to the ending inventories is: Ending work in process inventory: Equivalent units of production (see above) ....................... Cost per equivalent unit ....... Cost of ending work in process inventory ........................... Finished goods inventory: Equivalent units ................... Cost per equivalent unit ....... Cost of units completed and transferred out................... Materials Labor Overhead 300,000 $1.25 150,000 $2.20 150,000 $1.32 $375,000 $330,000 $198,000 200,000 $1.25 200,000 $2.20 200,000 $1.32 $250,000 $440,000 $264,000 Total $903,000 $954,000 © The McGraw-Hill Companies, Inc., 2008. All rights reserved. Solutions Manual, Chapter 4 185 Problem 4-26 (continued) 3. The necessary adjustments would be: Work in Process Finished Goods Total Total cost that should be assigned to inventories (see above) ............................................ $903,000 $954,000 $1,857,000 Year-end balances in the accounts .................................. 660,960 1,009,800 1,670,760 Error.............................................................................. $242,040 $(55,800) $186,240 Work in Process Inventory .............................................. 242,040 Finished Goods Inventory .......................................... 55,800 Cost of Goods Sold ....................................................186,240 4. The cost of goods sold can be determined as follows: Beginning finished goods inventory.................................. 0 Units completed during the year ...................................... 900,000 Units available for sale .................................................... 900,000 Less units in ending finished goods inventory ................... 200,000 Units sold during the year ............................................... 700,000 Cost per whole unit ($1.25 + $2.20 + $1.32) ................... × $4.77 Cost of goods sold .......................................................... $3,339,000 Alternative computation: Total manufacturing cost incurred: Materials (part 1. above) .............................................. $1,500,000 Labor (part 1. above) ................................................... 2,310,000 Overhead (part 1. above) ............................................. 1,386,000 Total manufacturing cost ................................................ 5,196,000 Less cost assigned to inventories (part 3. above).............. 1,857,000 Cost of goods sold .......................................................... $3,339,000 © The McGraw-Hill Companies, Inc., 2008. All rights reserved. 186 Managerial Accounting, 12th Edition Problem 4-27 (90 minutes) Weighted-Average Method 1. a. Work in Process—Refining Department............................ 495,000 Work in Process—Blending Department ........................... 115,000 Raw Materials ........................................................... 610,000 b. Work in Process—Refining Department............................ 72,000 Work in Process—Blending Department ........................... 18,000 Salaries and Wages Payable ...................................... 90,000 c. Manufacturing Overhead ................................................ 225,000 Accounts Payable ...................................................... 225,000 d. Work in Process—Refining Department............................ 181,000 Manufacturing Overhead ........................................... 181,000 d. Work in Process—Blending Department ........................... 42,000 Manufacturing Overhead ........................................... 42,000 e. Work in Process—Blending Department ........................... 740,000 Work in Process—Refining Department ...................... 740,000 f. Finished Goods .............................................................. 950,000 Work in Process—Blending Department ...................... 950,000 g. Accounts Receivable ....................................................... 1,500,000 Sales ........................................................................ 1,500,000 Cost of Goods Sold ......................................................... 900,000 Finished Goods ......................................................... 900,000 © The McGraw-Hill Companies, Inc., 2008. All rights reserved. Solutions Manual, Chapter 4 187 Problem 4-27 (continued) 2. (g) Accounts Receivable 1,500,000 Bal. Bal. Raw Materials 618,000 (a) 610,000 8,000 Bal. (a) (b) (d) (e) Bal. Work in Process Blending Department 65,000 (f) 950,000 115,000 18,000 42,000 740,000 30,000 Bal. (a) (b) (d) Bal. Work in Process Refining Department 38,000 (e) 740,000 495,000 72,000 181,000 46,000 Bal. (f) Bal. Finished Goods 20,000 (g) 900,000 950,000 70,000 Manufacturing Overhead (c) 225,000 (d) 223,000 Bal. 2,000 Accounts Payable (c) 225,000 Salaries and Wages Payable (b) 90,000 Sales (g) 1,500,000 (g) Cost of Goods Sold 900,000 © The McGraw-Hill Companies, Inc., 2008. All rights reserved. 188 Managerial Accounting, 12th Edition Case 4-28 (90 minutes) This case is difficult—particularly part 3, which requires analytical skills. Since there are no beginning inventories, it makes no difference whether the weighted-average or FIFO method is used by the company. You may choose to assign the problem specifying that the FIFO method be used rather than the weighted-average method. 1. The computation of the cost of goods sold follows: Transferred In Conversion Transferred In Conversion Units completed and sold ............................................... 200,000 200,000 Work in process, ending: Transferred in, 10,000 units × 100% .................................................. 10,000 Conversion, 10,000 units × 30% .................................................... 3,000 Equivalent units of production ........................................ 210,000 203,000 Cost to be accounted for: Work in process .......................................................... 0 0 Cost added during the month ....................................... $39,375,000 $20,807,500 Total cost to be accounted for (a) ............................................................................. $39,375,000 $20,807,500 Equivalent units (above) (b) ........................................... 210,000 203,000 Cost per equivalent unit, (a) ÷ (b) ............................................................................. $187.50 + $102.50 Whole Unit = $290.00 Cost of goods sold = 200,000 units × $290 per unit = $58,000,000 © The McGraw-Hill Companies, Inc., 2008. All rights reserved. Solutions Manual, Chapter 4 189 Case 4-28 (continued) 2. The estimate of the percentage completion of ending work in process inventories affects the unit costs of finished goods and therefore of the cost of goods sold. Gary Stevens would like the estimated percentage completion figures to be increased for the ending work in process. The higher the percentage of completion of ending work in process, the higher the equivalent units for the period and the lower the unit costs. 3. Increasing the percentage of completion can increase net operating income by reducing the cost of goods sold. To increase net operating income by $200,000, the cost of goods sold would have to be decreased by $200,000 from $58,000,000 down to $57,800,000. The percentage of completion, X, affects the cost of goods sold by its effect on the unit cost, which can be determined as follows: Unit cost = $187.50 + $20,807,500 200,000+10,000X And the cost of goods sold can be computed as follows: Cost of goods sold = 200,000 × Unit cost Since cost of goods sold must be reduced down to $57,800,000, the unit cost must be $289.00 ($57,800,000 ÷ 200,000 units). Thus, the required percentage completion, X, to obtain the $200,000 reduction in cost of goods sold can be found by solving the following equation: $187.50 + $20,807,500 = $289.00 200,000 + 10,000X © The McGraw-Hill Companies, Inc., 2008. All rights reserved. 190 Managerial Accounting, 12th Edition Case 4-28 (continued) $20,807,500 = $289.00 - $187.50 200,000 + 10,000X $20,807,500 = $101.50 200,000 + 10,000X 200,000 + 10,000X 1 = $20,807,500 $101.50 200,000 + 10,000X = $20,807,500 $101.50 200,000 + 10,000X = 205,000 10,000X = 205,000 - 200,000 10,000X = 5,000 X= 5,000 = 50% 10,000 Thus, changing the percentage completion to 50% will decrease cost of goods sold and increase net operating income by $200,000 as verified on the next page. © The McGraw-Hill Companies, Inc., 2008. All rights reserved. Solutions Manual, Chapter 4 191 Case 4-28 (continued) 3. (continued) Transferred In Computation of the cost of goods sold: Units completed and sold ............................................. 200,000 Ending work in process ................................................ Transferred in, 10,000 units × 100% ......................... 10,000 Conversion, 10,000 units × 50% ............................... Equivalent units of production ...................................... 210,000 Transferred In Cost of beginning work in process...................................0 Cost added during the month ......................................... $39,375,000 Total cost to be accounted for (a) ................................... $39,375,000 Equivalent units (above) (b) ........................................... 210,000 Cost per equivalent unit, (a) ÷ (b) .................................. $187.50 Conversion 200,000 5,000 205,000 Conversion 0 $20,807,500 $20,807,500 205,000 + $101.50 Cost of goods sold = 200,000 units × ($187.50 per unit + $63.75 per unit) = $57,800,000 © The McGraw-Hill Companies, Inc., 2008. All rights reserved. 192 Managerial Accounting, 12th Edition Case 4-28 (continued) 3. (continued) The following is an alternative approach to solving this problem: o The additional income needed = $200,000 ÷ 200,000 units = $1 per unit o The cost transferred in cannot be changed, so the conversion cost must be reduced from $102.50 to $101.50 per EU. o Therefore, the equivalent units for conversion need to be: $20,807,500 ÷ $101.50 per EU = 205,000 EUs. o 205,000 EUs – 200,000 units transferred out = 5,000 EU in WIP o 5,000 EU ÷ 10,000 units in WIP = 50% complete © The McGraw-Hill Companies, Inc., 2008. All rights reserved. Solutions Manual, Chapter 4 193 Case 4-28 (continued) 4. Mary is in a very difficult position. Collaborating with Gary Stevens in subverting the integrity of the accounting system is unethical by almost any standard. To put the situation in its starkest light, Stevens is suggesting that the production managers lie to get their bonus. Having said that, the peer pressure to go along in this situation may be intense. It is difficult on a personal level to ignore such peer pressure. Moreover, Mary probably prefers not to risk alienating people she might need to rely on in the future. On the other hand, Mary should be careful not to accept at face value Gary Stevens’ assertion that all of the other managers are “doing as much as they can to pull this bonus out of the hat.” Those who engage in unethical or illegal acts often rationalize their own behavior by exaggerating the extent to which others engage in the same kind of behavior. Other managers may actually be very uncomfortable “pulling strings” to make the target profit for the year. From a broader perspective, if the net profits reported by the managers in a division cannot be trusted, then the company would be foolish to base bonuses on the net profit figures. A bonus system based on divisional net profits presupposes the integrity of the accounting system. However, the company should perhaps reconsider how it determines the bonus. It is quite common for companies to pay an “all or nothing” bonus contingent on making a particular target. This inevitably creates powerful incentives to bend the rules when the target has not quite been attained. It might be better to have a bonus without this “all or nothing” feature. For example, managers could be paid a bonus of x% of profits above target profits rather than a bonus that is a preset percentage of their base salary. Under such a policy, the effect of adding that last dollar of profits that just pushes the divisional net profits over the target profit will add a few pennies to the manager’s compensation rather than thousands of dollars. Therefore, the incentives to misstate the net operating income are reduced. Why tempt people unnecessarily? © The McGraw-Hill Companies, Inc., 2008. All rights reserved. 194 Managerial Accounting, 12th Edition Case 4-29 (45 minutes) Weighted-Average Method 1. The revised computations follow: Equivalent Units of Production Transferred to next department........................ Ending work in process: Transferred in: 600 units x 100% complete..... Materials: 600 units x 0% complete ............... Conversion: 600 units x 35% complete........... Equivalent units of production .......................... Cost of beginning work in process ................... Cost added during the period .......................... Total cost (a) ................................................. Equivalent units of production (b) ................... Cost per equivalent unit, (a) ÷ (b) .................. Transferred In 1,800 600 2,400 Transferred In $ 4,068 17,940 $22,008 2,400 $9.17 Materials 1,800 0 1,800 Materials $1,980 6,210 $8,190 1,800 $4.55 Conversion 1,800 210 2,010 Conversion $ 2,160 13,920 $16,080 2,010 $8.00 © The McGraw-Hill Companies, Inc., 2008. All rights reserved. Solutions Manual, Chapter 4 195 Case 4-29 (continued) Ending work in process inventory: Equivalent units of production (see above) .. Cost per equivalent unit ............................. Cost of ending work in process inventory .... Units completed and transferred out: Units transferred to the next department..... Cost per equivalent unit ............................. Cost of units completed and transferred out Transferred In Materials Conversion Total 600 $9.17 $5,502 0 $4.55 $0 210 $8.00 $1,680 $7,182 1,800 $9.17 $16,506 1,800 $4.55 $8,190 1,800 $8.00 $14,400 $39,096 2. The unit cost on the report prepared by the accountant is high because none of the cost incurred during the month was assigned to the units in the ending work in process inventory. © The McGraw-Hill Companies, Inc., 2008. All rights reserved. 196 Managerial Accounting, 12th Edition Case 4-30 (60 minutes) FIFO Method 1. To complete beginning work in process: Transferred in: 450 units x 0% ...................................... Materials: 450 units x 0% ............................................. Conversion: 450 units x (1 − 60%) ............................... Units started and completed during the period (1,950 units started − 600 units in ending inventory)* ....................... Ending work in process: Transferred in: 600 units x 100% complete Materials: 600 units x 0% complete .............................. Conversion: 600 units x 35% complete .......................... Equivalent units of production ........................................... Cost added during the period (a) ....................................... Equivalent units of production (b) ...................................... Cost per equivalent unit (a) ÷ (b) ...................................... Transferred In 0 1,350 600 1,950 Transferred In $17,940 1,950 $9.20 Materials Conversion 0 1,350 0 1,350 180 1,350 210 1,740 Materials Conversion $6,210 1,350 $4.60 $13,920 1,740 $8.00 * 1,950 units – 600 units = 1,350 units © The McGraw-Hill Companies, Inc., 2008. All rights reserved. Solutions Manual, Chapter 4 197 Case 4-30 (continued) Ending work in process inventory: Equivalent units of production .......................... Cost per equivalent unit ................................... Cost of ending work in process inventory .......... Transferred In Materials Conversion 600 $9.20 $5,520 Units transferred out: Cost in beginning work in process inventory ..... $4,068 Cost to complete units in beginning work in process inventory: Equivalent units of production required to complete the beginning inventory (see above) .................................................... 0 Cost per equivalent unit .............................. $9.20 Cost to complete units in beginning inventory ........................................................... $0 Cost of units started and completed this period: Units started and completed this period ....... 1,350 Cost per equivalent unit .............................. $9.20 Cost of units started and completed this period ..................................................... $12,420 Cost of units transferred out ............................ Total 0 $4.60 $0 210 $8.00 $1,680 $7,200 $1,980 $2,160 $8,208 0 $4.60 180 $8.00 $0 $1,440 1,350 $4.60 1,350 $8.00 $6,210 $10,800 $1,440 $29,430 $39,078 2. The effects of the cost-cutting will tend to show up more under the FIFO method. The reason is that the FIFO method keeps the costs of the current period separate from the costs of the prior period. Thus, under the FIFO method, the company will be able to compare unit costs of the current period to those of the prior period to see how effective the cost-cutting program has been. Under the weighted-average method, however, costs carried over from the prior period are averaged in with costs of the current period, which will tend to mask somewhat the effects of the cost-cutting effort. © The McGraw-Hill Companies, Inc., 2008. All rights reserved. 198 Managerial Accounting, 12th Edition Case 4-31 (75 minutes) 1. Step method: Custodial Personnel Services Maintenance Printing Binding Total cost before allocations ............................ $360,000 $141,000 $201,000 $525,000 $373,500 Allocations: Personnel (@ $1,800 per employee)* ............ (360,000) 27,000 45,000 72,000 216,000 Custodial services (@ $1.20 per square foot)** ...................... (168,000) 24,000 96,000 48,000 Maintenance (5/6, 1/6) ................................. (270,000) 225,000 45,000 Total overhead cost after allocations ................ $ 0 $ 0 $ 0 $918,000 $682,500 Divide by machine-hours ................................. 150,000 Divide by direct labor-hours ............................. 175,000 Predetermined overhead rate .......................... $ 6.12 $ 3.90 * Based on 15 + 25 + 40 + 120 = 200 employees. ** Based on 20,000 + 80,000 + 40,000 = 140,000 square feet. © The McGraw-Hill Companies, Inc., 2008. All rights reserved. Solutions Manual, Chapter 4 199 Case 4-31 (continued) 2. Direct method: Custodial Personnel Services Maintenance Printing Binding Total costs before allocations ........................... $360,000 $141,000 $201,000 $525,000 $373,500 Allocations: Personnel (1/4, 3/4)* ................................... (360,000) 90,000 270,000 Custodial Services (2/3, 1/3)** ..................... (141,000) 94,000 47,000 Maintenance (5/6, 1/6) ................................. (201,000) 167,500 33,500 Total overhead cost after allocations ................ $ 0 $ 0 $ 0 $876,500 $724,000 Divide by machine-hours ................................. 150,000 Divide by direct labor-hours ............................. 175,000 Predetermined overhead rate .......................... $ 5.84 $ 4.14 * Based on 40 + 120 = 160 employees. ** Based on 80,000 + 40,000 = 120,000 square feet. © The McGraw-Hill Companies, Inc., 2008. All rights reserved. 200 Managerial Accounting, 12th Edition Case 4-31 (continued) 3. a. The amount of overhead cost assigned to the job would be: Step method: Printing department: $6.12 per machine-hour × 15,400 machine-hours ....... $ 94,248 Binding department: $3.90 per direct labor-hour × 2,000 direct labor-hours 7,800 Total overhead cost ...................................................... $102,048 Direct method: Printing department: $5.84 per machine-hour × 15,400 machine-hours ....... $ 89,936 Binding department: $4.14 per direct labor-hour × 2,000 direct labor-hours 8,280 Total overhead cost ...................................................... $ 98,216 b. The step method provides a better basis for computing predetermined overhead rates than the direct method because it gives recognition to services provided between service departments. If this interdepartmental service is not recognized, then either too much or too little of a service department’s costs may be allocated to a producing department. The result will be an inaccuracy in the producing department’s predetermined overhead rate. For example, using the direct method and ignoring interdepartmental services causes the predetermined overhead rate in the Printing Department to fall to only $5.84 per MH (from $6.12 per MH when the step method is used), and causes the predetermined overhead rate in the Binding Department to rise to $4.14 per DLH (from $3.90 per DLH when the step method is used). These inaccuracies in the predetermined overhead rate can cause corresponding inaccuracies in bids for jobs. Since the direct method in this case understates the rate in the Printing Department and overstates the rate in the Binding Department, it is not surprising that the company tends to bid low on jobs requiring a lot of printing work and tends to bid too high on jobs that require a lot of binding work. © The McGraw-Hill Companies, Inc., 2008. All rights reserved. Solutions Manual, Chapter 4 201 Research and Application 4-32 (120 minutes) 1. The processing departments for Anheuser Busch’s brewing process are listed below in sequential order. The raw material inputs are listed in parentheses next to the department where they are added to the manufacturing process. The Mashing Department (ground barley malt, water, and milled rice are added to production). The Straining Department (no raw materials are added). The Brew Kettle Department (hops are added to production). The Cooling Department (no raw materials are added). The Primary Fermentation Department (yeast is added to production). The Beechwood Aging Department (beechwood chips are added to production). The Filtering Department (no raw materials are added; brewmasters perform final quality control check at this point). The Filling/Packaging Department (glass bottles or aluminum containers as well as labels are added to production). The Shipping Department (cartons are added to production and then finished goods are shipped) 2. The brewing process consumes fairly large amounts of manufacturing overhead costs. This should be apparent to students based on the photographs that accompany the on-line tour. There are many pictures of large pieces of capital equipment that are used to make beer. Very few employees are shown in the photos contained in the on-line tour, which suggests that beer making is a capital intensive process. The depreciation costs associated with the equipment as well as the utility and maintenance costs incurred to run the equipment are three examples of overhead costs. It is also worth noting that the equipment shown in the photographs is large in size, thereby suggesting that Anheuser Busch’s beer-making facilities occupy a large amount of square footage—all of which needs lighting, heat, insurance, etc. These are additional examples of manufacturing overhead costs © The McGraw-Hill Companies, Inc., 2008. All rights reserved. 202 Managerial Accounting, 12th Edition Research and Application 4-32 (continued) 3. The T-account model is shown below: Raw Materials Wages Payable Manufacturing Overhead Work in Process: Mashing XXX Work in Process: Straining XXX XXX The T-account model shown above assumes that labor cost is incurred at each step of the process to operate and maintain the beer-making equipment. The Shipping Department adds packaging costs in the form of cartons. We also assume that equipment and labor costs are incurred to operate the carton packaging equipment. Once the beer has been packaged into cartons, we continue the flow of costs to finished goods. 4. While the on-line tour does not provide sufficient information to answer this question, it is reasonable to expect students to speculate that operation costing may be appropriate because each brand of beer uses different ingredients. Furthermore, some brands of beer go through a slightly different manufacturing process. These attributes of the brewing process suggest that some material costs and conversion costs may be assigned to particular batches of production rather than being spread over the entire volume of production for a given period of time without regard to the brand of beer being manufactured. © The McGraw-Hill Companies, Inc., 2008. All rights reserved. Solutions Manual, Chapter 4 203 Research and Application 4-32 (continued) To enrich this discussion, we recommend that you visit www.anheuserbusch.com/overview/abi.html. This web site requires viewers to be 21 years old, so we do not recommend having your students visit this site directly. Some excerpts from this web site that can be used to demonstrate the applicability of operation costing are as follows: “Bud Light is brewed with a malt and hops ratio different from Budweiser.” “Michelob is brewed with a superior ingredient blend…using all imported hops and a high percentage of two-row barley malt.” For Michelob Honey Lager – “Anheuser-Busch brewmasters combine two-row and caramel barley malt, a blend of imported and domestic hops, and a touch of honey to produce a full-bodied, slightly sweet beer.” Michelob Ultra is brewed using the finest pale two-row and six-row barley, select grains, all-imported hops and a pure cultured yeast strain. The special choice of grains, combined with an extended mash process, produces a smooth, refreshing beer with fewer carbohydrates.” Note to instructors: The requirements for this problem do not ask students to describe Anheuser’ Busch’s strategy. However, if you wish to broach this subject, Anheuser-Busch provides an interesting example of how a company tailors its business strategy to market segments. Anheuser-Busch succeeds first and foremost because of a product leadership customer value proposition. However, the company segments its market into no fewer than three main segments. The Michelob product family serves the high-priced, premium market segment. The Budweiser product family serves the mid-priced market segment. The Busch product family serves the low-priced market segment. Within each segment of the market, Anheuser-Busch strives to maintain a product leadership position by offering the best tasting beer available given the target price range. While Anheuser-Busch offers more than three product families that serve various niche markets, Michelob, Budweiser, and Busch are its three major brands. © The McGraw-Hill Companies, Inc., 2008. All rights reserved. 204 Managerial Accounting, 12th Edition